One of the reasons why people are so enthusiastic about refinancing real estate loans is that the new mortgage can have a lower interest rate and thus lower monthly payments. No one really wants to argue about whether lower minimum payments are good, but you do want to be sure that they'll be the best for you in the long run. Commercial real estate financing is often much more compact compared to residential financing; shorter repayment periods mean that you pay off the mortgage more quickly. Refinancing stretches those terms out, and you want to confirm that this will be the best move for you.
Lower Required Minimums
First, a benefit: those lower required minimums. If times are tough, and you want to save as much money as possible, a lower monthly payment is a dream. You're obligated to pay less, so the rest of the money you have can go toward other costs or even savings. If you are making less than you had, the lower payment gives you some breathing room.
Longer Payment Term and More Overall Interest
But that lower payment, if you choose to make only the minimum payment, can extend your commercial mortgage out by several years, meaning it will be much longer before you're free of the loan and own the property outright, and you'll end up paying more in interest in the long run. If you're OK with paying for a longer time or are refinancing just to have the lower obligation while still paying extra each month, then the interest won't be such a problem.
Avoiding Balloon Payments
If you refinance, you may still have a balloon payment at the end of the new mortgage. But it will be several more years before that balloon payment comes due, and it may be much smaller as you've had more time to pay down the principal of the loan. In fact, the extra time that the refinanced mortgage gives you could allow you to pay off most, if not all, of the rest of the mortgage over the years if you're able to pay more than the minimum. That would eliminate the balloon payment that's typically required at the end of the loan.
Waiting for Repeat Refinancing
You do want to time the refinancing carefully. Not only do you want to see a drop of at least a couple of percentage points in that interest rate, but you also want to be sure you're not jumping the gun and refinancing when another future drop in rates is evident. You can refinance as much as you want in most cases, but the banks you go to may not like too many refinancing situations in too short a time. So, when you refinance, make sure it's at a rate you'll be OK with if it turns out interest rates drop again after you've completed refinancing.
Contact a local finance professional to learn more about commercial property refinancing.
Share30 July 2021
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